Wyoming LLC Operations Guide

Wyoming LLC Operations Guide

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Asset Appraisals of LLC Assets

The value of all assets transferred to the LLC in Wyoming must be determined at the time of contribution to the LLC. Assets that do not have a readily ascertainable value, such as real estate, notes receivable, business interests in closely held companies or LLCs, may need to be appraised by a qualified appraiser.

Valuation of the LLC

In addition to the appraisal of the underlying assets contributed to the LLC, a qualified business appraiser or evaluator must also value the Wyoming LLC units when the units are gifted or sold and also in the event of the death of the owner of the units.  The valuation, or business appraisal, is needed to justify any valuation discounts claimed in connection with gifting, in order to substantiate the positions taken on Federal Gift Tax Returns.  A comprehensive appraisal is appropriate in the event of a challenge by tax authorities or in the event of litigation.  You should use a competent, well-qualified appraiser or evaluator who will produce a thoughtful, comprehensive and intelligible appraisal or valuation report.  An inexpensive appraisal may ultimately cost you far more than an appraisal report produced by a reputable business appraiser.  You should plan to pay for the expertise needed for a competent appraisal.

We use the following criteria in recommending appraisers:

The appraiser must have a good reputation for quality work in the field of appraisals. We depend on other law firms to tell us about their experience with appraisers.  We must have favorable reports about the appraiser’s work from other trusted professionals.

It may be appropriate to have the appraiser hired by the attorney to maintain the attorney-client privilege on communications between the appraisers, your legal advisors, and you. Since the communications between the law firm and the appraiser could affect the valuation adjustments determined by the appraiser, we often suggest that the information communicated be protected by attorney-client privilege.  Therefore, the law firm often retains the appraisers on behalf of the client.

We prefer to recommend appraisers with specific experience in family entities, with a successful track record for audits, and even those who have been hired by the IRS . There are many   business appraisers who prepare  valuation reports, but some have not valued family entities or been through an audit on the valuation issue.

Periodically Review Operations

We strongly recommend that you meet with your advisors periodically to review the operation of the LLC and to thoroughly document annual or more frequent meetings of the members.  Your financial advisors should monitor the performance of investment assets held by the LLC.  You must keep in mind that the LLC is a business entity, created for a business purpose, and must be operated as a business.

Need to Keep Your LLC Current

The tax laws concerning LLCs change on a regular basis.  New opportunities are regularly created, and some opportunities may be lost.  Therefore, do not look at your LLC plan as something you do and then forget.  It is a business.  Like any other business, it requires regular attention.

We suggest that you contact us to calendar annual LLC meetings.

Important Issues to Consider in Operating the LCC

The IRS has enjoyed considerable success in recent years by attacking partnerships and LLCs that were not properly operated.  The following is a checklist of the items or issues that should be taken into account to insure that your LLC is not one of those.

Transfer of all of senior generation’s assets to LLC leaving no assets outside the LLC to provide income to maintain the senior member’s lifestyle.

Title to real property or securities intended to be owned by the LLC should be formally transferred to the partnership.
A separate set of accounting books and records must be maintained for the LLC.

The LLC must have its own separate bank account, and income generated by the LLC must be deposited into that account.
Distributions from the LLC to members must be based on pro-rata membership interests.  The following distributions have been found to be fatal in some recent court cases:

  • distributions to pay for personal living expenses of an LLC member, particularly a senior generation LLC member
  • distributions to pay for special medical needs, including nursing home expenses.
  • distributions to make annual gifts to family members or to make loans to family members
  • indirect distributions in the form of rent-free use of residential property owned by the LLC.
  • Lack of regular meetings of LLC members and recordation through minutes of discussions of decisions made.
  • Failure to compensate managing member for services provided
  • Failure to properly reflect LLC income on K-1s to proper LLC member

Most states have used a standard for trust investments which has been called the “Prudent Person Rule” and which will apply, except as may otherwise be directed by the trust instrument.  Since this rule is the heart of all investment judgments, it is quoted here at length from a typical statute.

The Prudent Person Rule: In acquiring, investing, reinvesting, exchanging, retaining, selling, and managing property for the benefit of others fiduciaries shall be required to have in mind the responsibilities which are attached to such offices, the size, nature, and needs of the estates entrusted to their care, and shall exercise the judgment and care under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to permanent disposition of their funds, considering the probable income as well as the probable safety of their funds, considering the probable income as well as the probable safety of their capital.  Within the limits of the foregoing standard, fiduciaries are authorized to acquire and retain every kind of property, real, personal, and mixed, and every kind of investment, specifically including, but not by way of limitation, bonds, debentures and other corporate obligations, stocks, preferred or common, securities of any open-end or closed-end management type investment company or investment trust, and participation in common trust funds, that men of prudence, discretion, and intelligence would acquire or retain for their own account.

What does this mean for you?  Clearly this rule gives the Managing Member the power to invest LLC assets in the kinds of property in which men of prudence and caution would invest their own money.  It imposes on the Managing Member the standards of investment that a prudent investor would follow considering all the circumstances involved. Learn more about forming a Wyoming Limited Liability Corporation here.

The Managing Member should:
Consider diversifying the assets of the LLC among many types of investments such as stocks, bonds, mortgages, etc.
Consider diversifying among various industries with LLC stock holdings.
Consider current income as well as long-term capital appreciation and balance the interests of the beneficiaries of LLCU interests.

Seek professional guidance both for initial investment and for continuing review of investments held if the Managing Member is in need of such assistance.

The Managing Member should not:
Speculate with LLC assets.
Lend LLC assets without adequate security, or engage in other forms of self-dealing.
Continue to hold an investment that no longer meets the “prudent man” standards.
Continue to hold assets transferred to the LLC without an independent investigation of their quality as LLC investments.
Delegate investment decisions to others.  The LLC agreement instrument may enlarge or limit investment powers, but you should always keep in mind the Prudent Person Rule quoted above.

Important Note about Prudent Person Rule: In many states, the Prudent Person Rule applies to the entire investment portfolio.  This may or may not be the same as the business judgment rule that is generally applied to decision-makers in business entities.  When juries make decisions on these cases, they may consider the entire investment portfolio performance, but if they find one investment that does not meet the Prudent Person Rule, the jury may find the Trustee liable.  Generally there is a higher standard for Trustees than for other fiduciaries such as agents, business managers, general members, etc.

Transfer of Specific Assets to the LLC

Investment assets should go into the LLC.  These assets include:
Investment real estate;
Stocks, bonds, mutual funds, money market accounts, and CDs;
Business interests like shares of a closely held corporation (but not shares of an S corporation), partnership interests, and Limited Liability Company membership interests (be sure to check partnership, LLC, shareholder, and other agreements that might restrict the transferability of closely held business interests);
Notes receivable, and mortgages and trust deeds given as security for notes; and
Life insurance not owned by irrevocable gifting trusts or irrevocable life insurance trusts.

Assets That Should Not Be Transferred to the LLC

A homestead should normally be kept out of the LLC because of the tax advantages available to owners of a homestead residence (the homestead exemption for property taxes).  If the homestead is transferred into the LLC, fair market rent must be paid to the LLC.  Also, in many states, there are homestead exemptions that protect part or all of a personal residence from creditor claims.  These exemptions may be large or relatively inconsequential, depending on state law.

There are some situations where you might want the homestead to go into the LLC.  If the home value is high, the loss of the homestead exemption might cost considerably less in the long run when compared to any estate tax savings.  Also, if the creators of the LLC don’t mind paying rent (which could further reduce their taxable estate), then putting the homestead in the LLC could work.  Generally however, it is best to leave the homestead out of the LLC.

Non-business tangible personal use personal property, like furniture, jewelry, collectibles, and the like should be kept out of the LLC.  Since most clients prefer to continue to use their personal property, they should keep it out of the LLC in order to avoid having to rent it from the LLC.

Cars and other motor vehicles that are used for personal use should also be kept out of the LLC.  A motor vehicle can produce tremendous personal liability for the owner of the vehicle if an auto accident happens.  By keeping vehicles out of an LLC, our clients avoid having to rent the vehicles from the LLC, and also protect the LLC itself from incurring liabilities that can exist for owners of motor vehicles.

Annuities, IRAs, and other qualified retirement plan funds, should be kept out of the LLC since these items must be personally owned for certain tax purposes.  Transfer of these assets to an LLC would result in adverse immediate income taxes.  However, there are often ways to incorporate those assets into LLC planning.

Obtaining Distributions from the LLC

There are four ways to obtain cash from an LLC.

  1. First, the managers of the general member can be paid management fees for managing the LLC.  If the general member is an entity, the entity can use the management fee to pay salaries to its managers.

  2. Second, distributions (of income) may be declared.  When distributions are declared, all limited members receive a pro rata share of the distributions.

  3. Third, the LLC can make loans, at market interest rates, to the limited members or to the general member.  The note signed upon the creation of a loan, and any unpaid interest, is a legitimate debt for the taxable estate of the borrower if the loan is not paid back prior to death.  Such outstanding loans can reduce the estate tax of the borrower.

  4. Fourth, when distributions are paid, limited members could use the distributions to purchase more LLC units from the founders of the LLC should they desire to sell some of their LLC units.  Since these sales are at the fair market value (FMV) of the LLC units, this sale will get more LLC units out of the founders’ taxable estate, provide a source of cash to the founders, and allow the founders to “freeze” the value of their taxable estate to some degree.

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Cloud Peak Law Group, P.C.

203 S Main St #3000 Sheridan, WY 82801


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